The Securities Appellate Tribunal (SAT) has set aside a Sebi order that slapped a total penalty of about Rs 1.2 crore on three individuals for allegedly engaging in fraudulent trading practices in the stock market.

The entities were said to be invloved in "front running" related to the orders of foreign fund house Citigroup Global Markets Mauritius Pvt Ltd (CGMMPL) in the shares of Aurobindo Pharma, ICICI Bank and State Bank of India.

Front-running is an illegal practise where a stock broker executes orders on a security for his/her own account, taking advantage of advance knowledge of pending orders. However, in an order dated December 17, SAT set aside the penalties imposed on Sujit Karkera, Shilpa Kotak and Purushottam Karkera on the grounds that the norms only prohibit intermediaries from front running and not individual traders.

"Since the appellants (Sujit, Shilpa and Purushottam) are not intermediaries they cannot be held to have violated the provisions...in front running," SAT said.

SAT has set aside the penalty of Rs 60.73 lakh on Sujit Karkera, Rs 54.19 lakh on Shilpa Kotak and Rs 4.66 lakh on Purushottam Karkera.

In a probe conducted by Sebi it was observed that the entities, while trading through B P Equities were trading ahead of the trades of CGMMPL during October- December, 2008.

The trading was done with prior knowledge of the trades of CGMMPL in Aurobindo Pharma, ICICI Bank and SBI.

According to the probe, the entities had obtained prior knowledge in the trading of the scrips from one Suresh Menon, a trader of CGMMPL.

Call records of Sujit Karkera and Menon showed that transactions in the scrips were discussed in clear terms between the two.

Sebi had alleged that the entities had sold shares prior to the selling of the shares of CGMMPL.

It was also noticed that after purchasing the shares at a low price when CGMMPL was selling the shares they sold the shares subsequently earning profits.

Last month, in a similar case SAT had set aside a Sebi order penalising three persons for front-running – it was the first case involving individuals – which raised questions about the efficacy of the law.